D3sign | Moment | Getty Images
It’s an uneasy time for the many families who rely on the stock market’s returns to send their children to college.
Stocks have been in the red amid President Donald Trump’s new tariff policy and worries of a global trade war. The S&P 500 dropped around 15% between when Trump took office on Jan. 20 and Apr. 7, according to Morningstar Direct.
The index shed almost 11% in the two days of trading ending Friday, and continued its decline Monday. It was little changed Tuesday afternoon.
State-sponsored 529 college savings plans, like other investment accounts, may see the market selloff reflected in their balances. These plans, which are named after Section 529 of the Internal Revenue Code, allow parents to invest money and then withdraw it tax-free to cover certain education expenses.
Fortunately, you have options if a college bill is due soon, financial experts say. Meanwhile, if your child is still young, it may actually be a good time to buy stocks at a discount.
“The stock market will eventually recover,” said higher education expert Mark Kantrowitz.
At least that’s what history has shown. If an investor put $10,000 into the S&P 500 index on Jan. 3, 2005, and left that money untouched until Dec. 31, 2024, they would have amassed $71,750, for a 10.4% annualized return over that time, according to JPMorgan Asset Management’s research.
Here’s what college savers should know during the market volatility.
Age-based risk should protect many investors
Many 529 plans use an age-based asset allocation — meaning the mix of investments is based on the beneficiary’s age and time horizon, and typically becomes more conservative as they approach college enrollment age. In other words, families likely have very little invested in stocks by the time college is around the corner, and more in investments like bonds and cash. That can help blunt their losses.
“A 5 year-old has a long time horizon, whereas someone entering [college] this fall should not have that much at risk,” said Barry Glassman, a certified financial planner and the founder and president of Glassman Wealth Services.
Another benefit of the age-based investment strategy is that the funds automatically rebalance to sell high and buy low, added Glassman, who is also a member of the CNBC Financial Advisor Council.
“So not only are they getting less risky over time, but they have been taking profits as stocks have soared to bring risk back into check,” he said.
More from Personal Finance:
Selling out during the market’s worst days can hurt you
3 strategies to keep your money safe amid market volatility
Don’t miss these tax strategies during the tariff sell-off
Parents should check to see if their 529 plan account is invested in “a dynamic” portfolio, Kantrowitz said.
“The dynamic portfolios change the asset allocation either by age or enrollment date,” he said.
Typically, the age-based accounts start off at the time of the child’s birth with 80% to 90% in stocks, and gradually reduce that share to under 30% as college approaches, Kantrowitz said.
Short-term workarounds to preserve your 529
If you’re facing an imminent college bill and see that your 529 account balance has taken a big hit of late, you still have options to avoid drawing down the balance and to give stocks time to potentially recover, experts said.
You can use other potential cash savings or income to try to delay a 529 plan distribution until the market comes back, Kantrowitz said.
Another workaround would be to borrow federal student loans for now, with the aim of later taking a qualified distribution from the 529 plan to pay off the debt.
Families can potentially use their 529 college savings account to repay student debt for a beneficiary without incurring taxes or penalties, Kantrowitz explained. But the lifetime limit of the option is $10,000, he said.
‘Families should save more now’
Families with many years ahead of them before sending their child to college should see the current moment as investment opportunity, Glassman said.
“During market turmoil, they are scooping up bargains to invest for the future,” Glassman said.
Kantrowitz agreed.
“Pulling out funds now will lock in losses,” Kantrowitz said. “If anything, families should save more now that the market is down.”
Over longer periods, the stock market has historically given more than it takes.
Advisors say it’s best for investors, once they’ve set up a smart allocation strategy, to look away from headlines and let the market do its thing.
As stressful as the last few weeks may have been, such dips are not unusual, Kantrowitz pointed out. The stock market typically experiences at least three 10% drops and at least one 20% drop in any 17-year period, the typical timeline from birth to college, he added.
